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Fitch has issued another downgrade to Ethiopia’s credit rating, putting it squarely in junk territory with a ‘Restricted Default’ or RD status.

The credit rating agency has issued what it calls a “Long Term Issuer Default Rating” after the Ethiopian government failed to pay the first coupon on its outstanding USD one billion Eurobond due in full by December next year.

The USD 33 million coupon payment was due December 11, 2023, with a two-week grace
period.

The Ethiopian government has claimed that although the payment is “affordable,” it would not be making it due to its desire to ‘treat debtors equitably.’

Bilateral creditors including China agreed to a debt payment suspension deal with the Ethiopian government a few weeks ago.
The Eurobond was secured in 2014 and used to fund the construction of industrial parks,
including the flagship Hawassa Industrial Park.

The default rating is the latest in a series of four consecutive credit downgrades issued by Fitch Ratings since December 2022.

Source Ethiopian Reporter

Fitch Downgrades Ethiopia’s LTFC IDR to ‘RD’

Grace Period Ends: The downgrade of Ethiopia’s LTFC IDR to ‘RD’ and the issue rating on the country’s single outstanding USD1 billion Eurobond to ‘D’ from ‘C’ follows the government’s failure to pay the USD33 million Eurobond coupon that was due on 11 December 2023 before the end of the 14-day grace period on 25 December. Statements by the Ministry of Finance suggest that the non-payment reflects the effort to provide equal treatment to private creditors following agreements with official creditors to suspend debt service. 

Eurobond Restructuring: The Ministry of Finance has launched an engagement process with Eurobond holders and held a global investor call on 14 December 2023 to explain its position. The government hopes to reach an agreement on a restructuring with bondholders ahead of a Common Framework (CF) debt treatment. 

Official Creditor Debt Service Suspension: Ethiopia agreed an interim suspension of debt service payments with major Chinese creditors earlier this year and secured a similar agreement with other bilateral creditors on the Official Creditor Committee (OCC) in November. 

Lasting Debt Treatment Pending: The authorities and the IMF have not yet agreed on the parameters for an IMF programme, which is necessary to start negotiating a comprehensive debt treatment under the CF. However, progress has recently accelerated and the authorities expect that an IMF programme will be forthcoming in 1Q24, although this may still be optimistic. 

The OCC retains the right to cancel the debt service suspension if a staff-level agreement on an IMF programme has not been reached by end-March 2024.

Local-Currency Debt Not Affected:We have affirmed the Long-Term Local-Currency (LTLC) IDR at ‘CCC-‘, as the government has continued to service its LC debt. It has given no indication that it plans to include domestic debt in any debt restructuring. However, the ‘CCC-‘ rating reflects the significant risk of default arising from heightened macroeconomic imbalances and liquidity strains.

ESG – Governance and Creditor Rights: Ethiopia has an ESG Relevance Score (RS) of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Ethiopia has a low WBGI ranking at 21.6, reflecting the absence of a recent track record of peaceful political transitions, relatively weak rights for participation in the political process, weak institutional capacity, uneven application of the rule of law and a high level of corruption.

Ethiopia also has an ESG Relevance Score of ‘5’ for Creditor Rights, as willingness to service and repay debt is highly relevant to the rating. The downgrade of Ethiopia’s LTFC IDR to ‘RD’ reflects a default event.

Source: https://www.fitchratings.com/research/sovereigns/fitch-downgrades-ethiopia-ltfc-idr-to-rd-27-12-2023

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